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Dreaming of a new investment property? Maybe it’s time for a 1031 exchange.
Let’s start with the very basics, what is a 1031 exchange? A 1031 exchange allows investors to defer capital gains tax on the sale of an investment property. Sounds like a good deal, right. It is, if you have the right kind of property.
What kind of property qualifies for a 1031 exchange? It must be an investment property or a property held for income. Meaning, it can not be the home you live in. You must also have owned the property for over 1 year, and you can not have occupied the property for more than 14 days out of the calendar year.
How do I start a 1031 exchange? While the task may seem daunting it really is quite simple. Before you sell any property contact a QI (qualified intermediary). This is a company that acts as principal. They help guide you through the process, prepare the required documents, and hold the sale proceeds until the replacement property is purchased. The QI MUST be an independent 3rd party: it can not be your attorney, accountant, or realtor. Once you have everything set up with your QI; list your property for sale with your local real estate agent.
Once my relinquished property has sold what’s next? Next, you have 45 days to identify property that you are interested in purchasing. The properties that you identify need to be reported to your QI. The replacement property must be purchased within 180 days of the sale of the relinquished property. These time lines are not flexible, so be vigilant. If your not, you’ll be on the hook for capital gains taxes!
Do I need to reinvest in a like kind property in the same state? No you do not! You can sell anywhere in the United States and buy anywhere in the United States. It can be any real estate investment. Property type and location can change. For example you can sell a condo in Florida and purchase a 4 plex in Michigan. You can sell 5 houses in New York and buy an apartment building in Georgia. You could even sell a commercial property and buy 50 lots. The replacement property does need to be of equal or greater value and of equal or greater debt than the relinquished property.
Now that you know the basics of a 1031 exchange, its time to consider one for yourself. Contact me today to connected to a QI and list your investment property.
